Financing Exploration: How Access to External Finance Reshapes Innovation Strategy

Abstract

This paper examines how access to external finance reshapes innovation strategies. Using the 2008 Smaller Reporting Company rule as a quasi-natural experiment, I find that reducing information processing costs through standardized disclosure formats increases investor attention and equity issuance. Consequently, treated firms not only increase R&D spending and patent output but shift toward more exploratory innovation —pursuing diverse technological domains and producing more novel patents. Unlike conventional investments with diminishing returns, innovation exhibits increasing returns with greater funding access. Financial constraints thus alter not just innovation quantity but its fundamental value.

Keywords: Information processing costs, Innovation, Investors attention, Exploration

JEL Classification: G320, G380